In recent months, we’ve seen inflation continue to rise. But, what impact does this have on your State Pension? In our latest blog, our in-house experts explore the impact of rising price increases on your pension.
What is the State Pension?
The State Pension is a regular payment you receive from the government when you call time on your working career.
Living off the State Pension alone would be a tough act, which is why the government introduced Auto-Enrolment in the Pensions Act 2008 as a scheme to boost private pension savings.
A minimum of ten years’ worth of National Insurance contributions will see you receive the state pension, up to a maximum of 35 years’ worth of payments.
Once you qualify, you will begin receiving payments at State Pension age, which is 66 but set to rise to 67 by 2028. If you qualify for the maximum amount, you will be entitled to £185.15 per week, which works out to £9,267.80 per annum.
What is inflation?
Inflation is the way of measuring how much prices are increasing. It is calculated by looking at how the cost of everyday essentials are rising. For example, if a loaf of bread rises from £1, to 1.05, then bread inflation is 5%.
Inflation deflates the value of your money over time. However, placing your money in a pension could mitigate this.
Imagine you have £10,000 sitting in a briefcase in your bedroom for the next ten years. If inflation – as the government is pushing for this year – was at 2% for that decade, then the cost-of-living would be 20% higher today. Therefore, your £10k wouldn’t be able to buy you as much as it would have done years previously.
The State Pension Triple Lock
The Triple Lock was introduced by the UK government in 2010 to ensure that the State Pension was adjusted each year based on the higher of either average earnings, the Consumer Price Index (a measurement of rate of inflation) or 2.5%.
If inflation grew by 2%, so would the State Pension in an attempt to prevent consumers from being unable to afford everyday essentials.
Unfortunately, as we explained earlier this year, the COVID-19 pandemic created significant disruption. With many people placed on furlough and the economy left in dire straights following the pandemic, the government decided to pause the triple lock.
Furthermore, with the cost-of-living crisis and inflation rising, the State Pension in the UK is lagging the average earnings and CPI, hitting those who depend solely on the state pension hardest.
State Pension and retirement
In its current state, the State Pension alone would not be enough to accommodate a comfortable lifestyle.
However, with both DB and DC schemes available, you can invest more money for your future.
Throughout your career, you more than likely would have been enrolled into a workplace pension and have several pots – which may be worth consolidating to boost your whole retirement income.
To find them, you can use the government's Pension Tracing Service or the help of an IFA.
This article is for information only and should not be construed as advice or a recommendation. Please seek independent financial advice before taking any action. No action should be taken without independent professional financial advice as any actions on your pension may be irrevocable and have a big impact on your income in retirement.